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Implied Volatility from Asian Options Via Monte Carlo Methods
Christian-Oliver Ewald Center for Dynamic Macroeconomic Analysis, University of St. Andrews, School of Economics and Finance; University of Sydney, School of Mathematics and Statistics Zhaojun Yang Hunan University - School of Economics and Trade Yajun Xiao Goethe University Frankfurt - Department of Finance July 2006 Abstract: We discuss how implied volatilities for OTC traded Asian options can be computed by combining Monte Carlo techniques with the Newton method in order to solve nonlinear equations. The method relies on accurate and fast computation of the corresponding vegas of the option. In order to achieve this we propose the use of logarithmic derivatives instead of the classical approach. Our simulations document that the proposed method shows far better results than the classical approach. We also discuss the issue of variance reduction in order to optimize our method.
Keywords: implied volatility, Monte Carlo simulation, Asian options, exotic options JEL Classifications: C00, C15, C19, C51, C61 Working Paper SeriesDate posted: January 19, 2007 ; Last revised: January 03, 2008Suggested CitationContact Information
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